A Serendipitous Flaw: Could Bad Brakes Lead to Fundamental Reformof Amtrak?

About the Author

In his proposed
federal budget for FY 2006, released in February 2005, President
George W. Bush recommended that federal subsidies for Amtrak cease
after September 30, 2005. The federal subsidy covers about 40
percent of Amtrak's operating expenses, and the Administration's
withdrawal of that support would force Amtrak to file for
bankruptcy. Amtrak could then use the respite that bankruptcy
protection affords to restructure its operations to reduce costs,
raise revenues, and achieve financial self-sufficiency. Getting
this plan through Congress would have been difficult, to say the
least. But Amtrak's own ineptitude, along with an unexpected
equipment failure, may seal the deal and finally force reform of
the troubled railroad.

Bush's Amtrak
reform plan is the most far-reaching that a president has ever
recommended, and-no surprise-Amtrak's managers and employees, as
well as its many congressional supporters, have aggressively
opposed it. Indeed, few observers thought the plan had any chance;
instead, they predicted, Congress would pour even more money into
the system. Yet as the year has unfolded, the hapless railroad now
finds that a long legacy of managerial incompetence has locked it
into a self-inflicted financial death spiral that could give the
President much of what he wants and leave the nation with a more
effective passenger rail system.

The same week that
the President sent Congress the details of his plan to restructure
Amtrak, Amtrak announced that it was withdrawing all of its new
Acela trains from the Northeast Corridor (NEC) because of flaws in
the disc brakes that rendered them unsafe. Although Amtrak hoped to
fix the defective systems quickly, the problem turned out to be the
result of fundamental design flaws for which there may be no ready
remedy. As a result, Acela service may not be restored for many
months or even longer.

Because Acela
provided 45 percent of NEC ticket revenues and the NEC accounts for
65 percent of all Amtrak ticket sales (excluding state-supported
trains), the loss of the Acela will have a devastating effect on
Amtrak's near-term finances. Some analysts predict that Amtrak
could be financially insolvent by mid-August, in which case Amtrak,
as a private corporation, would have no choice but to file for
bankruptcy. Once the filing is approved, the court would appoint a
trustee to sort through Amtrak's operations and assets, determine
what can be salvaged, and recommend a path towards solvency. As
part of this process, the trustee would no doubt consider the
reforms proposed by the President and introduced in Congress by
Senator John McCain (R-AZ) as S. 1510.

The President's
plan includes three major reforms:

Transfer the NEC
to the Department of Transportation, which in turn would lease it
to a newly created entity that would operate NEC trains on behalf
of a compact formed and financed by the eight states that the NEC
serves.

Reduce federal
operating subsidies for Amtrak's 17 long-distance routes by phasing
in, between 2005 and 2008, incremental increases in the share of
the Amtrak subsidy that states pay for routes in their regions. In
the first year, states would have to cover any losses over 40 cents
per passenger mile; in 2007, losses over 10 cents per passenger
mile; and in 2008 and thereafter, all losses.

After three
years of operation, contract out all Amtrak routes that are still
in operation (except the NEC) to private operators on a competitive
basis.

The Importance of
the States

While many states,
and especially those served by NEC, will object to the provision
that they assume financial responsibility for subsidizing regional
rail service, such a requirement would make the system more
equitable. At present, Amtrak operates a total of 42 separate
routes throughout the country. Of those, 23-including the 4 routes
in the NEC-are the sole financial responsibility of Amtrak and
federal taxpayers. The other 19 are "state-supported trains." These
routes are operated by Amtrak and are largely, but not entirely,
subsidized by the states that they serve. Among the 19
state-supported trains are the Pacific Surfliner in California; the
Cascades, which connects Portland, Oregon, with Seattle; and the
Downeaster, which connects Portland, Maine, with Boston.

In an enterprise
seemingly characterized by pervasive failure, the existing
state-supported trains are one of the few bright spots in the
system. Carrying about a third of Amtrak's passengers, these 19
routes accounted for all of Amtrak's passenger growth during
the first half of this fiscal year compared to the same period in
2004. The state-supported routes saw ridership increase by 6.6
percent between 2005 and 2004, at a time when there was no growth
in overall ridership on the 23 routes for which Amtrak is fully
responsible.

The
state-supported routes are also less expensive for Amtrak (and
federal taxpayers) to operate than the routes that receive only
federal subsidies, some of which are hideously expensive. For
example, in FY 2004, Amtrak's Empire Builder, which serves Montana
and the Northwest, required a per-passenger subsidy of $175, and
the Three Rivers, in Pennsylvania, required a subsidy of $492 per
passenger-the highest in the country. In contrast, the
state-supported Pacific Surfliner cost federal taxpayers $18 per
passenger; the Cascades, $21 per passenger; and the Downeaster, $16
per passenger. Shifting more responsibility and oversight to the
states would likely reduce federal costs and lead to services that
would better serve passengers.

Does Congress Even
Care?

Because good
service and cost effective operations have never been priorities
for Congress or Amtrak's more than 20,000 employees, the
Administration will have to impose the reforms necessary to attain
these goals through bankruptcy proceedings, and Amtrak will be
forced to comply. Past efforts to improve Amtrak through
legislation and appropriations have largely failed because Amtrak
and its officers often ignored the law and congressional spending
priorities. In return, Congress often seems indifferent as to
whether Amtrak obeys its laws.

Just such an
instance was revealed at recent congressional hearings into the
staggering sums of money that Amtrak loses by selling foods and
drinks. Federal law states, "Amtrak may provide food and beverage
service on its trains only if revenues from the services each year
at least equal the cost of providing the service,"[1] But apparently the word
"equal" has a different meaning for Amtrak's officers. According to
the U.S. Government Accountability Office (GAO), in 2003 Amtrak
spent $158.8 million dollars on food and drink that it sold to
passengers for $78.4 million, thereby incurring a loss of $80.4
million-more than its gross revenues on those sales! And this
estimate may actually understate the loss: according to Amtrak's
Inspector General, Amtrak spends another $50 million annually to
operate and maintain its dining, snack, and lounge cars.
Altogether, financial losses on food service account for about 20
percent of Amtrak's annual federal operating subsidy.

In response to
these reports, on June 13, 2005, Amtrak president David Gunn sent a
letter to employees stating that "some of the testimony by…
the GAO is false" and that Amtrak is preparing a rebuttal to GAO's
analysis. But if anything, GAO's testimony was too optimistic.
After all, a section in Amtrak's April 2005 Strategic Reform
Initiatives and FY 06 Grant Request describes how "in an effort
to significantly reduce annual losses from food service operations
that now approach $100 million, Amtrak is evaluating several
options for immediate action." Relative to Amtrak's internal
accounting, GAO erred in Amtrak's favor by about $20 million.

How can a company
lose so much money selling beer and burgers? Paying its food
service workers $54,800 per year (plus tips) is part of the
problem. Amtrak's shortage of customers also plays a role: its
trains, on average, are less than half full (45 percent) when they
leave the station.

The inefficiencies
and incompetence that cause Amtrak's food services losses are
present throughout the system-in the maintenance yards, ticket
sales, train operations, track repair, janitorial services, and a
host of other services that Amtrak performs. As a consequence of
these collective missteps, Amtrak recorded a net loss of $645
million in its operations for the first six months of the current
fiscal year. And because this period ended before the Acela was
forced out of service, losses for the whole fiscal year could be
more than twice this number and will set a new record for red
ink.

Preparing For
Victory

But Amtrak's
current failings offer President Bush an opportunity to force
change on the system. When his Office of Management Budget (OMB)
proposed that the Amtrak subsidy end in FY 2006 to force the system
into bankruptcy and then reform, it must have known that the
prospect of success was limited because Congress was unlikely to
cooperate. OMB could not have known then, however, that Amtrak's
poor performance would obviate the need for congressional
cooperation in FY 2006 because Amtrak will likely reach insolvency
before the present fiscal year even ends.

While the chance
that the railroad will be restructured is now better than it has
ever been, there is always the risk that Congress will snatch
defeat from the jaws of victory and attempt an emergency bailout
before the end of the fiscal year. Already this year, many Members
of Congress have attempted to maintain or increase Amtrak's federal
subsidy for next year.

In response to the
President's proposal to end the federal subsidy, a majority in the
House of Representatives supported a budget resolution recommending
the continuation of its funding, while members of the Senate
narrowly defeated an amendment to their budget resolution that
would have increased Amtrak's subsidy to $1.4 billion from the $1.2
billion it received for this year. Some legislators want even more.
Rep. Dennis Rehberg (R-MT), for example, wants to make sure the
costly Empire Builder keeps running through his state and bragged
in a June 2005 press release that he supported legislation to raise
Amtrak's annual subsidy to $2 billion per year!

As Amtrak
approaches bankruptcy, such costly efforts to bail out the railroad
will increase in number and intensity. In the face of such threats,
the President should be prepared to veto any spending proposal that
would threaten his plans for restructuring and improvement.

Ronald D. Utt,
Ph.D., is Herbert and Joyce Morgan Senior Research Fellow
in the Thomas A. Roe Institute for Economic Policy Studies at The
Heritage Foundation.